What is the point and purpose of double-entry bookkeeping?

Question

I must be misunderstanding something when trying to research this topic because I genuinely do not understand to point of DE bookkeeping?

To me, DE shows the exact same information that single entry bookkeeping does. In single entry you have Debit (an expense) or Credit (an income) and for each purchase or income you write a single line with how much money is involved, and that number gets added or subtracted from the balance.

But from what I can tell, in DE bookkeeping, you write the exact same thing, but then you have a second line with the exact same amount in the other column. So for example if you make a purchase of $500 for books, in one line you write “Books | Debit: $500 | Balance: $XXXX” and then in a line immediately underneath it you write “Books | Credit: $500 | Balance: $XXXX” which all can be summarized in single-entry by saying “Books | -$500 | Balance: $XXXX”?

So other than maybe proof reading by “balancing the books” to make sure both columns add up to the same amount, I can’t or don’t understand if there’s any actual difference? Can anyone help?

In: Economics

Answer 1

You are missing the crucial difference in Double Entry Bookkeeping… that is that the extra entries are assigned to different account types/categories.

Here is an over simplified explanation…

With single entry, let’s say your account has a $50,000 balance.

You pay a utility bill of $10,000 (single entry)… your balance is now $40,000.

You deposit $30,000 from a business improvement loan (single entry) now your balance $70,000.

All this doesn’t tell you that much, just your running balance and the description of the transactions.

Now let’s do double entry…

Start with the same $50,000

$10,000 utility payment lowers the bank balance, but also is entered a second time as a cost in the business expenses account.

The $30,000 raises the bank balance, but is entered a second time raising the business liabilities by $30,000.

So instead of just knowing your business account total is $70,000 (single entry)… with double entry, you know that your business has spent $10,000 in expenses, owes $30,000 on a loan, and your current net assets are $40,000… not the $70,000 in your bank account.

In other words, double entry gives a more complete accounting picture of a business.